Texas limits on out-of-state alcohol may be headed to the Supreme Court

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It’s been a busy summer for booze-related litigation in Texas. I’ve written previously about the successful challenge by craft brewers to a 2013 law that makes them give away their distribution rights, and about a challenge to an overbroad interpretation of regulations preventing alcohol distributors from owning stock in grocery-store companies that sell alcohol.

Now, a new alcohol-related regulatory controversy may be headed to the Supreme Court. This case involves a theme that has otherwise been much in the news: protectionism.

The Constitution greatly limits states’ legal ability to favor in-state businesses at the expense of out-of-state businesses. Opposition to this kind of internal protectionism was one of the main motives behind the crafting of the Constitution in the first place. Laws that treat in-state and out-of-state businesses differently are subject to judicial scrutiny under the so-called “dormant” meaning of the Constitution’s Commerce Clause.

When it comes to alcohol, however, things are a bit more complicated. Before Prohibition, federal legislation limited the ability of states to put special restrictions on out-of-state alcohol companies. Courts held repeatedly that, while a state could ban alcohol sales altogether, it couldn’t ban out-of-state sales while leaving in-state sales legal.

Then Prohibition happened, and the whole issue became moot. Soon, however, the country came to its senses, and replaced the 18th Amendment (authorizing Prohibition) with the 21st Amendment. The 21st Amendment repealed the 18th, obviously, but it also preserved the right of states to enact alcohol prohibition if they wished. Section 2 of the 21st Amendment states as follows:

The transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.

Section 2 has created a fair amount of controversy over the extent to which state alcohol regulation is exempt from the ordinary anti-protectionist scrutiny under the Commerce Clause. In Granholm v. Heald, for example, the Supreme Court struck down a pair of state restrictions that made it effectively impossible to import wine into Michigan and New York. On the other hand, the Supreme Court also indicated that it was legitimate for a state to maintain a “three-tiered” system for alcohol (where the manufacture, distribution and sale of alcohol must each be handled by different entities) and suggested that a state could require alcohol distributors to be in-state businesses.

As a result, the legality of interstate alcohol sales often turns on arcane technicalities. My wife recently celebrated her birthday and one of her presents was a gift card for an online wine retailer. When she went to redeem the card, however, she found out that the site was prohibited by Texas law from selling to her. She was understandably indignant.

The ambiguity involved in the law is best illustrated by a Texas case that may be headed to the Supreme Court. Twenty years ago, the 5th Circuit Court of Appeals enjoined a Texas law imposing a one-year residency requirement for companies that seek a distributor’s license. This law, the court found, served only a protectionist purpose and so violated the Commerce Clause. In the wake of Heald, though, the Texas Package Store Association sued to reopen the case, arguing that the court had only applied scrutiny to laws discriminating between in and out-of-state manufacture of alcohol, while allowing discrimination for distribution.

The 5th Circuit didn’t buy it:

Because of the Twenty-first Amendment, states may impose a physical- residency requirement on retailers and wholesalers of alcoholic beverages despite the fact that the residency requirements favor in-state over out-of-state businesses. The Twenty-first Amendment does not, however, authorize states to impose a durational-residency requirement on the owners of alcoholic beverage retailers and wholesalers. Distinctions between in-state and out-of-state retailers and wholesalers are permissible only if they are an inherent aspect of the three-tier system.

The Texas Package Store Association has now asked the Supreme Court to take the case, which could provide some much needed clarity to this area of the law (or not; the Supreme Court is like that sometimes).

Regardless how the Court rules, these sorts of protectionist rules need to go. As with so many other parts of the code, arcane rules designed to favor one set of businesses over another do a disservice to the vast majority of Texas consumers.

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